What is the Cost of Carrying Inventory to Your Business?
Managing Costs in an Economic Downturn
In a business climate where everyone is trying to save money it is often difficult to come up with new strategies for cost-saving and efficiency. However, it is often the simplest methods that work the best, and managing effectively what you already have in place is perhaps one of the best places to start.
Looking at your stock and how it is managed is a great way to make an achievable and above all measurable difference to your bottom line. If you find that your business suffers from excess stock or is missing out on contracts because of an inability to fulfill orders then it is definitely time to review how your stock is managed.
Industry figures estimate that carrying inventory costs a business 25% of the stocking value per year, whether it is freeze dried fruit or stuffed animals. This means that for a business with $1 million worth of inventory, it will cost them $250,000 annually to maintain it in terms of warehouse space, insurance, administration, and so on. For e-commerce businesses on Shopify or Samcart that are just starting up that could be a cost difficult to absorb.
Better stock management
Managing stock turn and getting it right isn’t always easy, however, there are ways that businesses can optimize their inventory in order to provide better customer service and have products on the shelves for the least amount of time possible.
Business often to struggle to find a happy medium between having enough inventory to meet demand and at the same time keeping stocking levels to a minimum. As time goes on there is also the risk of that stock becoming obsolete. Depending on the industry obsolete stock can be more damaging than others – for example in fashion and technology, trends and developments change rapidly. As a result depreciation of stock can be up to 90% of its original value. Packard Bell was caught out with obsolete stock when customers demanded higher speed PCs than the ones they had on their shelves.
At either end of the scale an inability to meet demand means customer dissatisfaction which means lost business opportunities.
Any costs involved will ultimately end up being passed to the customer somehow so better and leaner practices up front will ultimately help businesses be more competitive to their customers on price but also fresher and more responsive in terms of delivery and new product development.
Combined factors for optimum stock
An optimum stock level is reached via a combination of factors – most commonly these are the estimated demand, the service level required from the customer and the lead time for delivery from the supplier. In theory it sounds simple to find this balance but forecasting is tricky particularly on new product lines where there is no previous history to go by. Similarly challenging your suppliers with shorter lead times is also difficult when it comes to buying from the Far East and using bulk ordering in order to achieve economies of scale.
Making investment for the future
Knowing that you haven’t optimized your inventory recently is a good starter for most businesses looking for cost savings. Improving forecasting methodologies can help manage stock more effectively. There are tools that can help this process and for companies who can afford to invest a managed Electronic Data Interchange (EDI) can prove extremely cost effective.
Companies shouldn’t see a reduction in inventory as a one off exercise it should be built in to your company culture and behaviors to truly embed it into your organization. Companies that successfully do this can expect to see between 30-40% reductions in inventory in the first year.
To work out the potential benefits to your bottom line here is a free inventory cost calculator link.
Other cost savings
As companies everywhere are looking to cut costs and yet maximize customer service looking at stock holding may not be for every business. Others may wish to consider looking at other operational areas such as order processes, auditing or other business requirements such as business insurance, telephone systems or IT software.
‘Just in time’ (JIT) is an often quoted example of how to achieve optimum production versus demand. This may not work for all businesses but business leaders can adopt its principles and adapt from them to what works for them.
Companies like Dell and Toyota have successfully adopted JIT. For Toyota they work on the principle that raw materials don’t even hit the production area until an order is placed and all the elements are in place for production to commence. The philosophy means that Toyota can be quick to react to industry changes and also lower their costs by carrying less stock.
In essence Toyota’s model and others like them don’t mean a reduction in quality to the customer they are examples of companies where scrutinizing internal processes first as a response to external market pressures means reduced wastage and streamlined yet effective internal systems and protocols.